Work

Local Currency Sovereign Risk

Year: 2013

Type: article

Abstract: Do governments default on debt denominated in their own currency? We introduce a new measure of sovereign credit risk, the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency denominated debt, local currency credit spreads have lower means, lower cross-country correlations, and are less sensitive to global risk factors. Global risk aversion and liquidity factors can explain more time variation in these credit spread differentials than macroeconomic fundamentals.

Source: International Finance Discussion Paper

DOI: 10.17016/ifdp.2013.1094

Authors: Wenxin Du, Jesse Schreger

Institutions: Federal Reserve, Federal Reserve Board of Governors, Harvard University

Language: English

Topic: Credit Risk and Financial Regulations

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

OpenAlex ID: W4299815030

FWCI: 3.498

Cites: 35

Cited by: 40

Related to: 10